Reading JP Morgan’s Tea Leaves: What They Mean for GS, MS, BAC

By Avi Salzman

JP Morgan Chase (JPM) and Wells Fargo (WFC) kicked off bank earnings season this morning, and both stocks are trading lower. Wells Fargo’s net interest margin fell more than expected and its revenue was below expectations, and investors appear to be nitpicking JPM’s generally strong results.

Investors can look at both companies to determine what they might say about the rest of the sector, but JPM’s results can shed light on a larger swath of companies because of its more extensive portfolio of businesses.

“Investment banking provided stronger-than-expected results this quarter, with beats in both fees and trading. Fixed income trading came in at $3.7 billion versus our expectations for $3.5
billion, up 7% linked quarter and 33% year over year.”

That’s a good sign for both Goldman Sachs (GS) and Morgan Stanley (MS), Cannon writes.

“As a whole, we expect the strong investment banking revenues this quarter to be a positive for both Goldman Sachs and Morgan Stanley,” Cannon wrote.

“The JPM results have a positive read-across for BAC as consumer credit trends improved (after looking through the regulatory change that required the bank to charge off loans, even if they are performing, where the borrower has filed Chapter 7 bankruptcy) significantly at JPM and mortgage and investment banking both performed well, giving some upside potential to BAC’s quarter. The upside on the read-across leads us to believe BAC will post a beat to the Street in the quarter and gives us increased confidence around our 15-cent operating estimate.”

JPM posted 8% quarter over quarter growth in mortgage originations, with a 2% decline in retail originations. BAC is heavily dependent on retail mortgage origination and Cannon expects “the upside potential to BAC’s mortgage numbers to be on the small side at $100-$200 million, given that JPM’s positive results in 2Q12 did not seem to translate into significant upside to BAC’s quarterly results, which we believe is representative of BAC’s recent market share declines.”

Overall, it’s fair to say expectations may have ticked up for Bank of America, but not by much, says Cannon.

“The combination of mortgage production and investment banking upside could add 1 cent to our estimates, all else equal, but we would also note that the decline in JPM’s deposit margins given the current rate environment could also show up in BAC’s numbers in the way of slightly lower net interest income to offset the upside to our estimates.”

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The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.